Abstract

We show that negative policy rates transmit to the real sector via bank lending in a novel way. The European Central Bank's lowering of the policy rate into negative territory in June 2014 induces banks with more deposits to lend less and to riskier borrowers. Banks do not adjust loan terms, and the risk taking is concentrated in poorly capitalized banks. New risky borrowers appear financially constrained, and invest more after receiving a loan. Besides highlighting the role of bank net worth for the supply of credit, our results point to distributional consequences of negative rates in the banking sector.